Farewell To Fed

Retiring Local Chief Reflects On Storms, Present And Past

When he became president of the Federal Reserve Bank of Chicago in July 1981, "the economy was going through a difficult time. It was very difficult here in the Midwest. Inflation was very high."

"It was," he says, "a very, very deep recession."

A recovery eventually followed. But that soon was overshadowed by bank failures, including the near collapse of the Chicago Fed's LaSalle Street neighbor Continental Bank.

Then, in the mid-1980s, falling interest rates caused a farm crisis in the bank's district, which includes most of Illinois, Indiana, Iowa, Michigan and Wisconsin.

The stock market plummeted in 1987 and 1989, causing consternation all around. And by decade's end, there was a worrisome level of problem commercial loans at a number of financial institutions.

"I certainly look back on all this and say it's been uneven as we've gone through it," says Keehn.

But with the economy rebounding and the banking system on a solid footing, Keehn, at age 63, has decided to retire this summer. Still, even as his career winds down, the man who leads the Chicago Fed can't escape the storm-not yet anyway.

As a member of the Fed, Keehn belongs to the group that decided in each of the last two months to raise a key short-term interest rate-a development that sent financial markets reeling.

Though Fed officials said the increases, each a modest quarter of a percentage point, are needed to stave off inflation, they have precipitated financial gyrations affecting everything from home mortgages to mutual funds. Suddenly every aspect of the once-ignored Federal Open Market Committee is grist for discussion.

"We are in the public focus because we have a very direct impact," allows Keehn.

The committee is a key component of the Federal Reserve system, which includes 12 district banks and a seven-member board of governors based in Washington, D.C.

Together, the governors and the district bank presidents form the Open Market Committee. While all principals discuss monetary policy during the meetings, only 12 members vote.

The Fed's seven governors always vote and are joined by five district presidents. The head of the New York Fed always has a vote. The chiefs of the Cleveland and Chicago banks take turns voting in alternate years. (Keehn is not a voting member this year.)

The three remaining slots are filled by the chiefs of the nine other districts on a rotating basis.

"We all make reports," Keehn says. "Some presidents tend to be more outspoken than others. But I couldn't sense any difference between what's going on this year versus five or six years ago."

Keehn considers the committee's deliberation a critical part of policymaking, including the so-called "go 'round" during which each Fed principal addresses the group.

"It is our opportunity to provide input into the policy process," he says. "This is a very, very important part of the Federal Reserve system. In the development of policy, you can't have a policy that's appropriate for one region and then a different policy that's appropriate for another region. It's got to be a balance. . . . that is appropriate for the districts as a whole."

It is difficult to gauge the influence of individual members, including Keehn, in private deliberations of the committee.

Certainly whoever represents the Chicago district is a "little more equal" than some of the other Fed presidents because of the voting power every other year, notes George Kaufman, director of the Center for Financial and Policy Studies at Loyola University.

Dana Johnson, head of capital markets research for First Chicago Capital Markets Inc. and a Fed watcher, calls Keehn a "team player" who has seldom cast a dissenting vote on monetary policy.

And if Keehn's almost effusive praise for Fed Chairman Alan Greenspan is an indication, he is solidly in Greenspan's policy corner.

Keehn, a career banker, rose through the ranks at Pittsburgh's Mellon Bank before coming to Chicago in 1979 to become chairman of Pullman Inc.

When he took over as Chicago Fed chief in 1981, he was jolted to find himself, literally only days into the job, voting on monetary policy. By stepping down about a year ahead of mandatory retirement, he hopes to make it possible for his successor to avoid a similar situation. The new member won't become a voting one until January 1995.

Keehn is courtly in manner and intensely private.

Detractors suggest he is colorless and corporate, but admirers, such as Robert Dederick, executive vice president and chief economist for Northern Trust Co, say he is "a class act . . . . He's wielded influence in a quiet way in the system and in Chicago."

Hollis W. Rademacher, former chief executive officer of Continental Bank and a longtime Keehn acquaintance, says the Fed president is "good with people" and a top-notch manager.

"Those guys have a heavy schedule of travel to Fed meetings and around the district as well as the business of running a real bank with the multiplicity of problems that entails," he says.

Rademacher recalls that in the early 1980s Keehn helped craft a strategy to save two local banks from failure and "had a hand in dealing" with the Continental situation.

Though a staunch defender of the Fed system, Keehn does foresee changes.

He expects consolidation of some Fed district bank operations. And he predicts that the onset of national interstate banking involving huge banks with a network of branches across the country likely will bring supervisory changes.